The following steps can be taken to ensure proper maintenance of cost records:

1. Study and examine the chart of accounts with special reference to the system of cost methods adopted by the company.

2. Study the basic raw materials and packing materials, chemicals and stores required for the manufacture of the product and their sources.

3. Study the organizational structure and know the details of manufacturing process.

4. Examine whether cost Centre’s are split-up into production & services functions

5. The licensed capacity and installed capacity should be ascertained. Any addition to production capacity during the preceding two years should also be ascertained.

6. Examine the adequacy of internal checks and control.

7. Before starting the assignment, meet the various important executives of the company and note down the functions, responsibilities and powers delegated to each.

8. Obtain an understanding of the business and the production processes involved, the flow of the process, till the finished goods are packed and transferred to the finished stores for dispatch.

9. Obtain the Balance Sheets of the company for the past two years and make a note of the important points contained in he Directors’ Report to the shareholders on the various financial, operation and technical matters.

10. Study the books/records containing production records etc., statistics maintained by the factory(s) in compliance with the Excise and other Government requirements and note down the Licensed and Installed capacities. Ascertain the reasons for shortfall in production, if any, as compared to the previous two years.

11. Compare actual production with the installed capacity.

12. Prepare a complete quantitative analysis beginning with input materials (both direct and indirect), corresponding production at each stage of production, any by-product or joint products produced, scrap and wastages generated, quantity transferred for captive consumption and the stage from which such transfer is taking place and final reconciliation with that of sales and stocks in respect of each type of product.

13. Study the Cost Accounting System followed by the company. Examine whether the same system is followed in case the Company is engaged in production of different and varied types of products manufactured at different locations and such locations are operating under different autonomous Divisions under the overall management of the Company.

14. Make proper identification of various production and service cost Centre’s and check whether the expenditure is initially booked to these cost Centre’s correctly.

15. Check whether the relevant cost accounting standards and generally accepted cost accounting principles (GACAP) are being followed for valuation of materials, utilities, overheads etc.

16. It is necessary to prepare individual service/utilities cost statements, viz., Water, Steam, Power, DM Water, Purified Air etc. Ensure consumption records of these utilities at various production and service Centre’s properly maintained and allocate the costs on an equitable basis to the various consuming cost Centre’s. In respect of supplies made to or
received from other units of the company, ensure that the transfers are made at cost of production/generation of the utilities and that the method followed is consistent. In case of inter unit transfers at pre-determined transfer price in financial accounts, the same has to be reversed for cost accounts and considered at cost.

17. Ascertain any abnormal reasons for low productions and/or high usage of services/ utilities and high down time in the plant. Find out whether these have been properly recorded and reported separately.

18. Verify whether consistency is maintained with regard to cost accumulation, cost analysis, cost allocation and apportionment, cost treatment and costing procedures adopted for inventory valuation from period to period.

19. Examine the records maintained for inter-company transfers.

20. Ascertain if any Royalty/Technical Services Fee has been paid to Collaborator/Technology Supplier. If it is one-time lump sum payment, check whether the charge to cost of product is spread over the period for which benefit is to be derived out of the payment and the same is equitable and reasonable.

21. Examine whether there is any Royalty agreement and check its effect on cost of production and allocation of the cost to the product.

22. Examine the practice followed for maintaining quality of the product and related Quality Control Expenses. Check the amount incurred on quality control, quality audit etc. and their treatment in the cost of product.

23. Examine whether the company is complying with the various legal provisions with respect to pollution control and the expenses incurred therefor and whether absorption of such cost in the product is done equitably and consistently.

24. Cost of production should be derived for domestic sale and export sale separately.

25. Verify the reconciliation statement between the profit/loss as per the cost accounts and as per the financial accounts. Also examine the variations and reasons thereof.

26. Examine whether the data maintained in the cost record are reconciled with the relevant returns submitted by the company to government authorities.

27. Where a system of standard costing is used, it should be ensured that such costs are converted into actual for the purpose of determining the figures required to comply with the requirements of Cost Accounting Record Rules. The method of adjustment of variances to arrive at the actual cost from the standard cost should be examined.

28. Examine that cost statements have been prepared as per requirements of Cost Accounting Records Rules.

29. Examine whether Cost Accounting Standards and Generally Accepted Cost Accounting Principles issued by the Institute of Cost Accountants of India are being followed.

30. Examine whether there are any abnormal features affecting production during the year, e.g., strikes, lock-outs, major breakdowns in the plant, substantial power cuts, serious accidents, etc., and what is their impact on the cost of production.

31. Examine if there are any special expenses, which have been directly allocated to products under reference, and what is the total amount as also the incidence per unit of product.